You may have noticed increasing coverage of Initial Coin Offerings (ICO ) in the press recently. You may not, however, be totally clear what an ICO is.
The easiest way to explain it is that it’s a type of crowdfunding that has grown out of the current growth in popularity of Bitcoin and other cryptocurrencies.
In an ICO a company seeking investment will release its own cyryptocurrency to secure funding from external investors. The company will release a fixed number of crypto-tokens and then sell those tokens to investors. Usually the investors will pay for these token in Bitcoin but it is not unheard of for investors to use more standard currencies like US dollars, Swiss Francs or Sterling.
Although there are variations on the machinations of an ICO, the desired outcome is always the same. The company trading the tokens gets the capital it needs to take the next step and the audience receives a wholly owned share of the business in the form of their crypto-tokens which then act as their shares.
There is a common belief in the technology market that an ICO is the same as an IPO (an Initial Public Offering). Ostensibly it works on the same basis but there are a few subtle differences.
Firstly in a traditional IPO the shares purchased by an investor are representative of their voting power as well as the percentage level of their ownership of the company they have invested in. This is not always the case with an ICO. The number of crypto tokens received could be commensurate with their voting power (i.e. the more tokens you have, the more of a say you have) but it is not a given; by definition the tokens are simply a currency to be exchanged for other currencies.
As one of the leading specialists in the law surrounding digital currency, we would urge you to look closely at all of the small print around an ICO before you invest. It may be that you are simply looking to make a short-term profit on the tokens you receive but if you are also looking to influence the development of the company you are investing in long-term, you need to be absolutely sure that the terms of your investment will permit that.
Secondly, as they are a mainstay of the world’s various trading exchanges, IPOs are heavily regulated by government. This means anyone offering an IPO has to be fully compliant with the regulations set out by the government of the country it will be offering its shares in or from.
As cryptocurrency crowdfunding is a new phenomenon it does not yet enjoy the same governmental and legislative protection. From a legal perspective this means any investment is currently made with as much risk as opportunity for the investor.
As the lack of regulation means that literally anyone can launch any project we would suggest you take great care to make sure the company you are interested in a) definitely has an in-demand product with a commercial future and b) actually exists as a corporate entity and can prove the project is fully staffed and in production.
As litigators who are constantly working on disputes involving Bitcoin and crypto and digital currencies we would urge you to follow this simple 3-step checklist if you are interested in actively investing in an ICO:
- Check the small print. Make sure your investment will provide all of the ownership and the rights you need and want it to
- Understand the risks. If you are uncomfortable making a significant investment via a platform that sits outside the usual market regulations, think twice and think hard
- Do your due diligence. Make sure the company you want to invest in is a going concern and that the project you are investing has the proper research and the required staff behind it
If you can tick all 3 boxes, you are reducing the risk of becoming embroiled in any form of legal dispute over your investment later on. More importantly you are also giving yourself a much better chance of successfully settling any dispute that may arise in your favour.
If you think you may have become the victim of an ICO fraud or are concerned an company you have invested in is not living up to the terms of your investment (or, indeed, if you have any other legal queries regarding any form of digital currency) please email This email address is being protected from spambots. You need JavaScript enabled to view it. or call 020 7792 5649.
